Commissioner of Internal Revenue

versus Sony Philippines, Inc

G.R. No. 178697, November 17, 2010
Second Division, Mendoza, J.

Facts: The Commissioner of Internal Revenue (CIR) issued a letter of Authority

(LOA) to examine Sony Philippines’ (Sony) books of accounts for the period
“1997 and unverified prior years.” The preliminary assessment, was protested,
then the CIR issued final assessment notices. Sony sought re-evaluation by filing
protest, the Court of Tax Appeals (CTA,)disallowed the deficiency VAT
assessment, however sustained, with respect to the EWT assessment. CIR filed
for review with the CTAEB who affirmed, Hence, a petition for review to the
supreme Court.

Issue(s): (1) Whether Sony should be liable for VAT deficiency (2) Whether Sony
should be liable for Expanded Withholding Tax Deficiency at 5%. (3) Whether
the final withholding tax on royalties at issue was filed on time.

Decision: No.Yes. Yes. Petition Denied. The Letter of Authority must have a grant
of authority before any revenue officer can conduct an examination, and only
within the limits of the given authority. In absence of such, authority the
assessment is a nullity. Here, the LOA was for yr. 1997 and prior yrs. and the
assessment covered for yr 1998, hence a breach of authority. The Letter of
Authority covered more than one taxable year which is proscribed by the
Section C of the Revenue MO-43-90. Due this violation, the VAT assessment
should be disallowed. CIR claims that since SIS reimbursed Sony’s advertising
expense, Sony should never have incurred any advertising expense and not
entitled to a tax credit. Section 110 of the Tax Code provides that an
advertising expense covered by a VAT invoice is a legitimate business expense.
Where the money came from is another matter altogether but will not change
that Sony paid for issued invoices for advertisement expenses. CIR argues that
the reimbursement from SIS was income to Sony, thus taxable. It is taxable with
income tax, yet not to 10% VAT as CIR argues. VAT may be levied only when
there is a sale barter or exchange of goods or properties. Here, SIS just gave
assistance and did not receive anything in return. The EWT assessment on
Sony’s Commission expense is subject to 10% rate when the recipient is a
natural person as provided in Revenue Regulation 2-98. Here the expenses at
question pertained to salesmen. An EWT assessment may be based on a tax
rate of 5% for brokers, and agents of professional entertainers. Here, the Court
observes that what should apply is the 5% tax rate since the revenue regulation
was only adopted in April 1998, and the existing rule for the subject assessment
then fixes the 5% rate. CIR insists that Sony must be held liable for final tax on
royalty payments. RR 2-98 provide that Sony is required to deduct and withhold
final taxes on royalty payments when the royalty is paid or is payable. After
which the corresponding return, and remittance must be made within 10 days
of each month. Sony was not yet late in paying final taxes on its royalties since
the royalties were payable until August 1998, and Sony remitted July 8, 1998.

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